The Holy Grail of Sustainability & Supply Chain Planning

Søren Hammer Pedersen (00:09):

Hello everybody, very warm welcome to this S&OP MasterClass from Perito Consulting. The purpose of these masterclasses is to dive into trending topics within supply chain planning and give our perspective on how you can use this in your daily life. I’m joined here in the studio today with my very good colleague, Benjamin, who will try to give you some of the perspective on today’s topic. And today’s topic is part of a series on sustainability and supply chain planning, and today we dive into the more operational side of sustainability and supply chain planning. But before we get into it, first of all, Benjamin, could you please introduce yourself a bit to the new listeners here?

Benjamin Obling (00:53):

Absolutely, and thanks for having me. So yes, I’m Benjamin and I’m co-founder of Perito working in Integrated Business Planning.

Søren Hammer Pedersen (01:00):

Thank you. So if you’re interested in some of the definitions around supply chain planning and sustainability, dive back to some of our previous podcasts, but today we’ll get very hands-on on the operational side of things. I think my first question, Benjamin to you is why should we interest ourself as supply chain planning professionals so much around the operational side of the sustainability thing?

Benjamin Obling (01:26):

I’ll say because the CO2 emissions, the sustainability, part of the total, when you look at the total emissions on the company, a lot of that will be coming from supply chain or the emissions will be within supply chain. So that means a lot of the targets for reducing the CO2 emissions will be in supply chain. So that means targets will be hitting us soon in supply chain, if not already. And in order to operationalize and make sure that we do it in the most clever way, we need detailed information and transparency in order to make sure that we do the CO2 reductions where it hurts us the least or maybe even we can profit from it. But in cases where it’s not possible, where does it do least harm?

Søren Hammer Pedersen (02:12):

Yeah, so when we as a supply chain need to push back to many of the things going around in sustainability areas in the companies at the moment, we need to be able to answer what is it actually we need to make the operational side of this work? So let’s just dive into that perspective. We talked about the deep transparency later on. So not that part, but more from operational side, what do we need to be able to work this on a daily, weekly, monthly basis in our supply chain?

Benjamin Obling (02:45):

The basis is the deep transparency as you say. So knowing where do we do the CO2 emissions. And when we know that we can start to simulate, and that’s the interesting part where we can start to operationalize it and say, what if we do X, Y, Z? How will that impact the CO2 emissions? But then making sure that the data is, and the simulation models are detailed enough so we can also assess what will be the impact of that reduction. So as an example, what if we go from transportation mode, air to sea, you will then first calculate what is the CO2 impact of that.

(03:19):

So we’ll reduce the CO2, so that’s good, but you will also increase the lead times. You’ll increase stock in transit. So what is the cost aspect of that? You might also increase scrap because if you have a life cycle of shelf life on the products, we need to be able to assess that and have the simulation capabilities of assessing that. Something that we normally do in the integrated business planning, so here it’s more about adding the dimension of CO2 saying, okay, if we do this scenario compared to this scenario, so the air versus sea freight for example, what will be the impact both in terms of emissions, the good stuff, and also in terms of costs and impact on the supply chain?

Søren Hammer Pedersen (04:02):

So if I hear you correctly, many of the things we do in our planning and many of the principles that we are brought up with in the supply chain planning, it’s still the same principles, it’s still the same method basically. But we are adding a new dimension to this, for instance, we still need our overviews and things like that in the planning. But we just have now a new dimension that we need to take into account.

Benjamin Obling (04:28):

Yeah, exactly. Where we’re taught in the business schools and of course by the board that we need to maximize the profit. And in that sense, when we do the simulations. And we would also previously do the simulations and scenario comparison of saying, okay, do we go by air, do we go by sea? In that example. And then we would look at what is the current working capital impact of that? And on the other hand, does it have other implications? Yes, freight costs for example. Okay, so when we balance the two, what is the most profitable of those two alternatives? And then we pick the profitable one in the old days. Now we would also be looking at the sustainability but still looking at the profitability of course. Because if we do that and measure the different initiatives we have in terms of CO2, but also in terms of profit impact, then we can basically rank it and then say, “Okay, I’ll do the initiative that does the most good for the lowest cost.”

Søren Hammer Pedersen (05:23):

Yeah. So basically same exercise but with new parameters. I think that’s a very good point. But what about, I guess, people also have to, when they put up scenarios, something like that, they have to be aware of this new dimensions in terms of looking a bit broader out into the future. This is of course allowing us on the day-to-day planning to help us make the right decisions. So you need the data in there, do I go by sea, do I go by air? But you also have to be looking at the trends more on a new dimensions.

Benjamin Obling (06:04):

Yeah, exactly. That would be true in order to find out, do we actually meet the target. So if we take the initiatives we’ll have a baseline of CO2 emissions and then we’ll have the initiatives which will hopefully reduce the emissions, but we also have the change in the business. So that could be revenue increases, changes in mix, different customers, and so on, that are driving different emissions through the supply chain. And in order to be able to project that into the future, we need that detailed information so that we can use the demand forecast which we already have in the system, hopefully at a detailed enough level and at a high quality.

(06:42):

So we can take the demand forecast, use that as a base to say, okay, when we extrapolate our baseline emissions into the future, one, two years into the future. And then we add our initiatives on top of that. And then we’ll see, do we actually then hit the target or is the case that our revenue increase in certain product areas, for example, means that the CO2 emissions are higher within those areas? That actually means because of the mix and the increase in revenue will actually end at a higher emission level, even though we do the initiatives we set out to do. So it actually improved our baseline, but we still ended up in with a higher emission. We need to be able to explain that in order to set the targets and follow up on are we actually able to fulfill the targets or project whether we are.

Søren Hammer Pedersen (07:29):

Yeah. And I think a very interesting question here, what is the new target then? How do we as planners, when we have this new dimension, this optimization that we are going to have on a daily, weekly, monthly level in the planning, how do we help the planners actually have this mindset, but also of course making for the company the right decisions?

Benjamin Obling (07:52):

Yeah, because it is of course to some extent that we’ll start to see that, for example, transportation modes or fill rates of different trucks or the selection of products when in terms of moving goods, for example, slow steaming, selecting different green products is not entirely up to supply chain. Or supply chain needs to take the sustainability part into account because of course we can set up the planning in supply chain or the planners can do it in such a way that we need air freight from time to time. Because we lower the safety stock, the service levels, et cetera. And then we start to fly a lot of goods for example. That would be one parameter, which is actually very deep into the detail of the setting the parameters in the ERP systems, very nitty gritty supply chain planning task. But super important.

(08:39):

Derive from that we’ll see air transportation increasing for example. So that balancing needs to be in a broader audience, you could say. Or you need to make sure that the targets are also put upon supply chain in order to do that balancing in supply chain. So that they can see, okay, if I reduce the safety stocks for example, that means I’ll have more air freight because I’ll go out of stock in more cases. And if it’s not okay to go out of stock, then I’ll start to fly stuff. Okay, that will increase the CO2 emissions.

Søren Hammer Pedersen (09:12):

Yeah. But I guess also if we thought before that we really needed data and we really needed automation, this is next level-

Benjamin Obling (09:22):

Absolutely.

Søren Hammer Pedersen (09:22):

Need we are in here because so many decisions, the individual planner or even at a tactical level is not able to oversee all those. So a huge focus must be on data and automation digitalization here.

Benjamin Obling (09:38):

Yeah, exactly. And you need to take as much data from the ERP systems as we discussed a bit in the previous session. Take as much as you can from the ERP system because there we have live data all the time. And then using the external databases to assess the impact of that activity. And then you will also need some new data points to that as well. So that could be like raw material categories or it could be how much electricity is going into it and so on. And maybe a bit more detailed information on the transportation, like transportation modes or different products you select. So that’s the, for example, slow steaming where you have a longer lead time, but then you have slower CO2 emissions. All of that coming from the ERP system will be or should be completely automated. And also getting the data from the external sources should be automated. But you will of course need to have some additional data points. And then you first of all need a model that can put that together to make that deep transparency so we can simulate.

Søren Hammer Pedersen (10:36):

Yeah. But I guess also automating decisions here because there will be a lot of decisions and a lot of choices, but some of them will be able to be automatized, so we can only look at the last 20% alerts and this will come into play here as well. That’s a huge important point.

Benjamin Obling (10:58):

Yeah, absolutely. Because of course you can’t do this trade off and balancing with every decision that you do. So it’s more a matter of how you set up the supply chain in order to do this. So saying for example, the default route will be sea instead of air, so that’s one. Or when we fill up a container going from Asia to Europe or vice versa, then making sure that we fill it up by at least 80% instead of the 50% we used to do that will impact your working capital because you are going to move some goods in advance that you actually didn’t want to move right now, so not a good thing on the working capital part, but you have to do that.

(11:35):

So that will be some targets that you have in the operational level where they would then set the targets to the planner saying, “This is the fill rates we want now, and you are allowed to do that.” Even though when we do the followup on the inventory controlling afterwards saying, oh, why did you get those goods before you needed them? I did that in order to fill up the container because that will have the CO2 emission impact that we want. And a lot of that can be automated as default routes for example, having higher safety stocks. This will give a-

Søren Hammer Pedersen (12:10):

At the moment anyway, many companies-

Benjamin Obling (12:12):

Be a problem for you. Okay. So do we really want to increase that? But yes, in order to reduce the number of stockouts, because when we have stockout we’ll start to do something which is not optimal from a CO2 point of view. We’ll start to go by plane for example, instead, or go by air.

Søren Hammer Pedersen (12:26):

So the good news here is that it’s many of the same mechanisms that we know already, but there’s just this new dimension that we need to take into account and also make sure that we work through the whole planning process, taking that into account, setting up so much automated as we can, but we have to work through everything basically.

Benjamin Obling (12:47):

Yeah, yeah. Yeah, absolutely. And then acknowledging that we are going now to take some decisions that we would in the old days consider as not the optimal solutions, but now we know that if we do this, this will actually be the cheapest way of achieving the CO2 emission reduction that we want. So even though we are increasing working capital and so on, that might actually be cheaper than other initiatives we could do in the supply chain. So replacing steel by something that emits less CO2 using plastic instead of metal, for example in the products. So re-engineering that might be a less cost efficient way of reducing the CO2 as compared to changing transportation mode for example. But we need then of course to be sure that we can then actually measure it so that we know this is the right thing and this is the cheapest way to reduce it.

Søren Hammer Pedersen (13:39):

Yeah. But of course, as we talked about in previous podcasts, there’s no choice in many companies you will be hit by this train anyway, so you might as well be a winner in it. Even though it can be a daunting task to go into this, would be very interesting for many supply chains to go into this process and learn a lot actually on this. The last point I think is interesting is also this won’t be that easy as a starting point. We still need some controlling and looking backwards on our decisions put into these processes.

Benjamin Obling (14:16):

So the monitoring or the controlling, after we’ve set out, we have the time, we have the baseline, we have the target, and now we start to in our everyday lives start to hit us and we had an ambition of filling up the containers 80%, did we actually do that? How much of the transportation is now by sea as compared to air, et cetera, what will that mean in terms of emission? But if we do that in the same model with the same level of detail, we’ll also be able to explain why we didn’t hit the target if we didn’t. Because if the reason is that yes, we’ve actually increased our revenue, so we’re actually selling more, so we took some market share from the competitors, we’re actually are still doing a better job because per unit you could say, we are emitting less CO2 and then doing that in the most efficient way so that the cost aren’t really high.

(15:03):

Because you could also put in, in the other way that if you don’t have the profit impact together with the CO2 reduction and can actually list that in your initiatives, and imagine you had let’s say 50 different initiatives in the company of reducing the CO2, if we just randomly pick that based on what we feel sound nice, feels good, and you don’t look at the profit impact, it might be very costly to make that reduction of 20% or 50%, et cetera. And the other approach of that is basically of course look at the profit impact, look at the CO2, and then just sort it by the lowest cost per CO2 reduction. And that will be a lot more efficient in terms of profits.

Søren Hammer Pedersen (15:45):

Yeah. Good. I think it’s a hugely interesting topic this and of course we could talk for hours on this, but I think the main message from you here is that you need a supply chain now to pay attention to what’s going on in terms of sustainability. You will get hit by this. So take an interest now in what kind of data will you be presented with and if it’s not enough or not good enough or not detailed enough, you need to take an interest now and of course find out how can you answer in a good way, how will you make this operational daily, weekly, monthly, or longer time horizon as well. And what do you need to make it operational so you actually can work with this on a operational level and how can you project the future. These are the main points here, but as I said, get started now because it’s coming.

Benjamin Obling (16:49):

Yeah, sure. Otherwise, you’ll be hit by some of these changes anyway and they will impact it hugely. And then we just say, okay, now we can’t go by air anymore. Okay. That has a huge impact on my supply chain. So I would like to be able to influence that decision and make sure that it’s actually done in the most profitable way with the highest impact on CO2 reductions.

Søren Hammer Pedersen (17:10):

Perfect. Thank you so much for your input here today, Benjamin. Very, very interesting. And it’s not the last we have talked about these topics. Many of our clients have a huge interest of course, in these areas as well. And I also thank you to your listeners out there. Always a pleasure that you tune into our S&OP MasterClasses here. Hope you got some useful insights you can use in your own organization or at least started a good thought for yourself. And of course, feel free to reach out if you want to debate any of these topics with us. You can find it on the website. We’d be more than happy to put this in context of your own organization. But thanks for now and hope you tune in again another time.